Work Hard, Earn Less?
American workers have been getting the short end of the stick since 1943.
That's when the United States Congress, in response to the costs of World War II, passed the Current Tax Payment Act. The act requires employers to withhold taxes from their employees' paychecks, overturning the previous system in which workers were paid first and settled their tab with the government later.
The Current Tax Payment Act is why so many people look at their paychecks and wonder where all their money has gone.
My poor dad -- who also happened to be my real dad -- often said to me, "Go to school, get good grades, so you can find a good, secure job with benefits." My rich dad, on the other hand, had a different point of view.
Instead of advising me to work hard for money, my rich dad said, "If you want to earn more and pay less in taxes, you need to have people and your money work hard for you." In other words, my rich dad encouraged me to be an entrepreneur and investor.
Today, workers who save money and invest in a 401(k) plan are the highest taxed people in America. Now, I can hear some of you asking, "Isn't saving money and investing in a 401(k) having your money work for you?"
No -- at least not according to the IRS. A worker's pay is taxed at the highest tax rate possible. So are your savings and income from your 401(k). In most cases, money goes into a 401(k) tax-deferred but comes out as highly taxed ordinary income.
One of the reasons the rich are getting richer is because they have more control over our number one expense: Taxes.
For example, my passive income from real estate can be the lowest taxed income of all. On one of our commercial properties, my wife and I receive approximately $30,000 a month in income -- almost tax-free. When we sell the property, we can legally take the capital gains without paying capital gains tax, which in our state would be 20 percent. Try doing that with stocks, bonds, mutual funds, or real estate investment trusts (REITS). In fact, mutual funds can be a tax trap if you do not understand the rules.
Another example, when we invest in oil and gas projects, we receive approximately a 70% tax deduction and a depletion allowance -- another tax break -- for income from oil and gas revenues. That means if I invest $10,000 in oil and gas, I can deduct approximately $7,000 from my income as well as receive a tax break for income from the sale of the oil and gas.
Obviously, I'm not a tax professional and you should not make any tax or investment decisions based on this brief article. My point is this: If I had followed my poor dad's advice and got a job with a 401(k), there would be almost nothing an accountant could do to protect me from higher taxes. The 1943 Current Tax Payment Act saw to that. Today, employees with a 401(k) work hard and earn less.
The federal government provides the biggest tax breaks for business owners and investors in oil and gas and real estate. Why? Business owners provide jobs and jobs mean employees who pay higher taxes. The economy needs oil and gas so anyone who explores for oil and gas are given big tax breaks. And people who invest in real estate are given big tax breaks because the government needs investors to provide housing. If investors didn't provide housing, the government would have to.
After 1943, people who worked for money lost most of their tax breaks. Now, entrepreneurs and investors get the big tax breaks -- and that's another reason the rich get richer.